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New Oregon Legislation Intended to Ease Employer Costs Due to PERS’s Unfunded Liability

On May 30, 2019, the Oregon Senate and House passed Senate Bill 1049, the most recent legislative attempt at significant PERS reform. Governor Kate Brown signed the bill into law on June 11, 2019. The main thrust of SB 1049 will be to reduce the annual employer contributions required to eliminate the $27 billion unfunded liability by extending the current payment period over which the liability is amortized.[1] SB 1049 aims to slow the pace of required contributions over the next several years through other measures as well. For example, it includes provisions for a single $100 million infusion into the State’s Employer Incentive Fund for use as a 25% match on employer contributions into PERS that exceed the employer’s required PERS contribution. Such contributions and the match would generally be used to reduce the contributing employer’s required contributions to PERS. Significantly, and as discussed in more detail below, the new law will also divert a portion of the annual contributions made to the Individual Account Program (IAP), which is PERS’s version of a 401(k)-type retirement account, to ”stability accounts” in order to reduce the PERS general fund’s current unfunded liability.[2]

SB 1049 orders the creation of stability accounts for PERS covered employees. Stability accounts are individual employee accounts that will be used to pay for that employee’s pension benefit and therefore reduce the amount of PERS’s unfunded liability. Presently, employees are required to make an annual contribution equal to 6% of the employee’s compensation to the employee’s IAP account. Many employers “pick up” the 6% contribution by paying it on behalf of their employees. Under SB 1049, employees hired before August 28, 2003 would see a reduction in the contribution to their IAP accounts from 6% to 3.5%, with the remaining 2.5% paid over to the employee’s stability account. For employees hired on August 28, 2003 or later, only 0.75% will go toward each employee’s stability account, leaving a contribution of 5.25% of pay that will continue to be credited to the employee’s IAP account. In the event that PERS’s unfunded liability is reduced sufficiently, employee stability accounts will be credited back to each employee’s IAP account.

Public employee unions are expected to contest the legality of diverting contributions from IAP accounts to the PERS general fund. To do this, they will be forced to grapple with the Oregon Supreme Court’s lengthy 2015 opinion in Moro v. State of Oregon. In that case, the Supreme Court held that revocable contract terms in the PERS statute can be changed prospectively, while irrevocable terms cannot be changed after an employee’s date of hire. The Court noted that a vesting schedule, for example, is an irrevocable contract term because it takes time for both parties to perform their end of the bargain. By contrast, the Court in Moro held that changes to a PERS COLA formula could be applied to benefits that had not been earned at the time the applicable COLA statutes were amended—in other words, on a prospective basis. Unless the Oregon Supreme Court is willing to turn its back on the rationale behind the Moro decision, public employee unions will likely have an uphill battle attempting to prove that the percentage-of-pay requirement and the allocation of public employees’ contributions to IAP accounts were intended to be irrevocable contract terms at the time a public employee is hired.

Recent public comments about SB 1049 suggest that unions will demand bargaining over aspects of this new legislation. As with any demand to bargain, the employer’s duty will depend on specific circumstances including existing contract language and where the parties are in the bargaining cycle. In similar cases involving PERS reform, ERB observed that there is no duty to bargain over the decision to comply with the law, but there might be a duty to bargain over the impacts of that decision. Thus, the passage of SB 1049 could create bargaining obligations for public employers.

As always, Bullard Law would be happy to assist your organization with any employment, labor or employee benefits issues, including advice on implementing the PERS reforms in SB 1049 and potential bargaining obligations.

[1] Without SB 1049, the current $27 billion unfunded liability is expected to be zero in 2035. The reduction in unfunded liability would be achieved primarily through steep increases in required employer contributions to PERS. As a result of SB 1049, the unfunded liability is projected to be roughly $12 billion in 2035.

[2] The unfunded liability is the present value of the expected cost of the benefits earned by PERS members that exceeds the assets held for paying those benefits.